Han Huishi: Will the RMB be “active” again?

Abstract The author has repeatedly mentioned in previous articles that the author believes that after the unilateral depreciation of the RMB against the US dollar is expected to collapse, in the future, at least until the first quarter of next year, the possibility of maintaining high-frequency fluctuations is higher. Unilateral devaluation of amplitude, such as challenging 7.0 again (...

The author has repeatedly said in previous articles that the author believes that after the unilateral depreciation of the RMB against the US dollar is expected to collapse, in the future, at least until the first quarter of next year, the possibility of maintaining high frequency fluctuations is high, and a large extent occurs again. The unilateral devaluation, such as the probability of challenging 7.0 (or even 6.9) again, is already very low. Even if the US dollar index can rise again, such as once again challenging 100, the probability of a sharp depreciation of the renminbi against the US dollar is not high.

However, many friends (and friends who have been fighting for many years in the capital market) have recently asked whether the supervisory authority will once again present the banner of "exporting by devaluation".

The general logic is as follows: The appreciation of the renminbi is unfavorable for exports. If the renminbi against the US dollar remains generally stable in two-way volatility when the US dollar index appreciates, then the renminbi will appreciate against a basket of currencies, which is inevitable. Further increase the export pressure. Judging from this year's foreign trade data, while the RMB has strengthened in the first three quarters, the import and export surplus has shrunk significantly year-on-year, while the shrinking of the surplus is not conducive to the strong exchange rate, and it is also not conducive to the stable growth of GDP. In the unlikely event that the US dollar index climbed sharply with the Fed’s interest rate hike and contraction at the end of the year, while the renminbi continued to stabilize against the US dollar, the negative impact on the export surplus may increase. Will this lead to a supervisory authority to temporarily abandon the exchange rate stability priority, and instead use the exchange rate depreciation to stimulate exports, and contribute to steady growth?

Before answering the above questions, we first need to be clear: whether it is to stimulate foreign trade or stimulate GDP growth, it is not the main task of the central bank.

I don't know when to start, the central bank is responsible for economic growth, and monetary policy needs to be a natural understanding of GDP in many people's minds. But please note that "the central bank's primary task is to ensure the stability of the currency" is the consensus of central bankers around the world. As for whether it can promote economic growth, it is a question that will be considered only on the premise of stable currency values. It must not be overwhelmed by the Lord.

The reason why many people misinterpret the economy as the central bank's top priority may be related to the fact that public opinion always puts the central bank's monetary policy operations (such as raising and lowering interest rates) and macroeconomic data changes together. Of course, the central bank does not care completely about macroeconomic indicators such as import and export, consumption, investment, etc., but these must not be the starting point for monetary policy making. The more policy goals, the more difficult it is to achieve any goal, which should be common sense.

Looking back, in 2015-2016, we actually conducted an experiment to promote economic growth by depreciation (of course, it may not be intentional), but on the whole, the final result is not ideal.

In 2015-2016, the RMB exchange rate against the US dollar depreciated by about 11%, the nominal effective exchange rate of the RMB (for a basket of currencies) depreciated by about 2.4%, and the real effective exchange rate of the RMB depreciated by about 2.2%. Is the depreciation of the RMB declining the economic growth rate and shrinking exports? It may be a mitigating effect. There may still be controversy between the academic and the real industry. In the past two years, GDP growth has declined and exports have shrunk. However, due to the overall global weakness, it is not easy to distinguish the overall effect of RMB depreciation on economic growth. The huge impact of rapid devaluation in 2015 and 2016 on market confidence is obvious. The continued depreciation of the renminbi has not brought about stable market expectations. Under the stimulation of various pessimistic public opinions, enterprises and people have a strong willingness to purchase foreign exchange, which has made it difficult to resolve the pressure of RMB depreciation in the long run.

When a country’s currency credibility is challenged, it is not just a question of the central bank, but a problem that the whole country must take seriously. There are too many international cases in this regard, and it is not necessary to repeat them. So a brief summary of the results of the rapid depreciation of the RMB in 2015-2016 is that the stimulus effect on economic growth is difficult to quantify, but the impact on currency credit and market confidence is obvious to all.

In the face of a tough situation, in 2017, the tone of the RMB exchange rate policy changed dramatically. From January to August, the foreign exchange settlement and sales deficit continued. On the whole, the power of market trading is exerting depreciation pressure on the renminbi. However, the renminbi is not depreciated, but it continues to strengthen. The reasons behind this should be well known.

Facts have proved that with the strengthening of the RMB exchange rate, market confidence has gradually recovered and capital outflow pressure has rapidly declined. This is a good result, both for the monetary authorities and for the overall macroeconomic stability. It can be said that the renminbi is now a clear-cut moon.

Having said that, let's take the problem one step further. In 2017, the market’s pessimism about the renminbi has indeed eased a lot, but is it really time to sit back and relax?

The author thinks that it is not yet. The reason is very simple. Until September of this year, according to the SAFE data, there was a surplus of US$300 million in bank settlement and sales, and the first 8 months were deficits. Although the scale of the deficit is rapidly declining and eventually turned into a surplus, comparing the surplus of import and export trade of US$296.1 billion in January-September this year and the surplus of US$106.4 billion in current accounts, we can easily find that the market is against the RMB. In fact, there is still a lot of disagreement in the market outlook. The confidence of the market in the medium- and long-term stability of the renminbi is still in the process of establishment, instead of being 100 assured.

In this market environment, how to avoid the resurgence of market unease is the focus of exchange rate policy. As for whether the renminbi should stimulate exports through devaluation and stimulate GDP, I am afraid it will not be the main consideration of the regulatory authorities. After all, this is not the responsibility of it. The shocking 2015 and 2016 are just the past, and the scars are not good, so it is estimated that they will not forget the pain.

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